The UAE government introduced a new corporate tax regime in September 2020 to diversify the economy and generate additional revenue. The new tax framework applies to companies not owned by the government, with a corporate tax rate of 9%-15%. However, several exemptions and reductions are possible. The revenue generated from the corporate tax will be reinvested in infrastructure and public services, benefiting businesses in the long term.
Corporate Tax (CT):
Corporate tax in the UAE is a tax levied on the income or capital of a company. In January 2022, the Ministry of Finance announced the upcoming implementation of federal corporation tax (CT) on net business earnings. This tax will take effect on either 1 July 2023 or 1 January 2024, depending on the fiscal year. CT will apply across all the emirates in the UAE.
Objectives of Corporate Tax:
By introducing CT, the UAE aims to:
- Strengthen its position as a premier global business and investment hub,
- Accelerate its development and transformation to meet its strategic objectives, and
- Reaffirm its commitment to fulfilling international tax transparency requirements and avoiding detrimental tax procedures.
Corporate Tax will apply to:
- All businesses and individuals in the UAE who operate under a commercial license.
- Free zone businesses (The UAE CT regime will continue to honor the CT incentives currently offered to free zone businesses that comply with all regulatory requirements and do not conduct business set up in the mainland UAE.)
- Foreign entities and individuals are subject to the regulation only if they regularly engage in trade or business activities within the UAE.
- Banking operations.
- Businesses involved in real estate management, building, development, agency, and brokerage.
Corporate tax (CT) Exemptions in UAE
Exemptions for Businesses:
- Companies involved in natural resource extraction will be exempt from CT, but they will still be subject to Emirate-level corporate taxes.
- UAE businesses are eligible for exemption from Corporate Tax on their dividends and capital gains earned from qualifying shareholdings.
- Exemption to qualifying intra-group transactions and reorganizations provided that all mandatory conditions get met.
Exemptions for Individuals:
Apart from the above exemptions, the following categories of individuals are also exempt from Corporate Tax:
- Those earning a salary or other employment income, whether from the public or private sector.
- Those earning interest and other income from bank deposits or saving schemes.
- Foreign investors earn income from dividends, capital gains, interest, royalties, and other investment returns.
- Individuals making personal investments in real estate.
- Individuals earn dividends, capital gains, and other income from owning shares or other securities in their personal capacity.
Corporate Tax Rates in the UAE:
- 0% for taxable income up to AED 375,000.
- 9% on taxable income in excess of AED 375,000.
- 15% on taxable income for large multinationals that meet specific criteria set concerning ‘Pillar two’ of the OECD Base Erosion and Profit Shifting Project.
Corporate Tax – Registration & Deadlines
The Federal Tax Authority (FTA) has opened early registration for corporate tax, as per the Federal Decree-Law No. 47 of 2022, which mandates that Taxable Persons should comply with Corporate Tax from the start of their first financial year starting on or after 1 June 2023. For certain UAE-based companies, an early registration period is available from January 2023 to May 2023, with invitations sent by the FTA via email and SMS to register through EmaraTax.
Other companies and businesses will be able to register at a later date, with the FTA announcing the dates in advance to ensure compliance. Priority will be given to companies and businesses with a financial year commencing on 1 June 2023 when registration opens.
Value Added Tax (VAT):
VAT is a value-added tax applied on products and services at all stages of production and distribution. It is a consumption tax ultimately paid by the end consumer.
The UAE implemented VAT on January 1, 2018, with a standard rate of 5%, generating a new revenue stream that is used to provide high-quality public services. It also contributes to the government’s goal of lowering dependence on oil and other hydrocarbons as a source of revenue.
Criteria for Registering for VAT:
- If a business’s taxable supplies and imports exceed AED 375,000 per year, it must register for VAT.
- It is optional for businesses with annual supply and imports in excess of AED 187,500.
On Which Businesses Does VAT Apply?
Certain free zones have been classified as VAT-designated zones. While the regulations apply to supplies produced in the defined zones, firms created in such zones may still be required to register for VAT if the registration conditions are met.
Registration and Filing of VAT Returns
To register for VAT, businesses must create an account on the FTA website’s eServices section. Upon registration, businesses subject to VAT must file their VAT returns regularly with the FTA, within 28 days from the end of the relevant “tax period” which may differ for each type of business. A “tax period” is a specified time frame for calculating and paying the payable tax. The standard tax period for businesses is:
- Quarterly if their annual turnover is below AED 150 million, and
- Monthly if it is AED 150 million or more.
Implications of VAT in the UAE
Effects on Businesses:
Businesses must accurately document their business income, expenses, and associated VAT charges. All customers must be charged VAT at the current rate, and the purchase of goods or services from suppliers will result in VAT expenses for them. The difference between these sums is either paid to or reclaimed from the government.
Effects on Individuals:
VAT applies to most transactions involving goods and services, with few exceptions. Thus, the cost of living may increase slightly, depending on an individual’s lifestyle and spending habits. However, if an individual primarily purchases VAT-exempt items, they may not experience a significant increase in costs. Businesses must provide clear information about how much VAT an individual must pay for each transaction, allowing individuals to make informed purchasing decisions.
Differences: Corporate Tax Vs. Value Added Tax
|Corporate Tax (CT)||Value Added Tax (VAT)|
|Profit-based tax||Consumption-based tax|
|A tax on a company’s income or capital||A tax on the value added at each stage of production and distribution|
|Applicable on net profits of businesses||Applicable on the value added to goods and services|
|Levied at a rate of 0% or 9%, depending on income||Levied at a standard rate of 5%|
|Applicable to businesses conducting activities under commercial license in the UAE||Applicable to all businesses that exceed certain thresholds for taxable supplies and imports|
|This applies to banking operations, real estate management, construction, development, agency, and brokerage activities||Applicable to businesses in designated zones for VAT purposes|
|Applies to banking operations, real estate management, construction, development, agency, and brokerage activities||This applies to a wide range of goods and services|
|Aims to level the playing field for businesses and reaffirm commitment to international tax standards||Aims to provide a new source of income and reduce dependence on oil and hydrocarbons as a source of revenue|
Practical implications of Corporate Tax and VAT for businesses operating in the UAE:
Impact on profitability
The introduction of corporate tax means that businesses will have to pay a percentage of their net profits to the government, which could reduce their profitability, especially for companies that operate on thin margins. On the other hand, VAT can also impact profitability, as businesses are required to charge VAT on their sales and pay VAT on their purchases. This situation could increase the prices of goods and services, affecting demand.
Both corporate tax and VAT require businesses to maintain accurate financial records and file regular tax returns, which can be time-consuming and costly, especially for smaller companies that may not have the resources to hire tax experts or invest in tax software. Non-compliance can result in penalties and fines, further adding to the costs. This is where Easyfiling comes in.
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Impact on cash flow
Since VAT is a consumption tax that is ultimately paid by the end consumer, businesses are required to collect VAT from their customers and remit it to the government. This means that companies may have to pay VAT to the government before they receive payment from their customers, which could impact their cash flow. On the other hand, corporate tax is paid on profits, meaning businesses will only have to pay tax when they are profitable.
The implementation of corporate tax has the potential to create a more equitable business environment by subjecting previously tax-exempt entities to the same tax regulations, which could provide smaller businesses with a competitive edge, as they may have previously been at a disadvantage compared to tax-free entities. Similarly, businesses that can absorb the impact of VAT without passing it on to their customers may gain a competitive advantage by offering lower prices.
Opportunities for tax planning
While both corporate tax and VAT have their own set of rules and regulations, there may be opportunities for businesses to engage in tax planning and minimize their tax liability. For example, businesses may be able to take advantage of exemptions and deductions under the corporate tax regime or optimize their supply chains to reduce their VAT liability. Easyfiling can assist you. Our team combines their extensive knowledge of local tax regulations and experience in cross-border transactions to provide innovative and reliable solutions to meet our client’s needs. To learn more about our tax planning services in the UAE, go here.
Overall, the introduction of Corporate Tax and VAT in the UAE has significant implications for businesses operating in the country. While these taxes may increase the cost of doing business, they also provide the government with a new source of revenue, which can be used to invest in infrastructure and public services that benefit businesses in the long term.
In summary, while corporate tax is a tax on a company’s revenue or capital, VAT is a tax on the value added to goods and services at each stage of production and distribution. The UAE’s corporate tax regime aims to diversify the economy, generate additional revenue, and meet international tax standards, all while helping reduce dependence on oil and other hydrocarbons in the area.